SEC Sanctions Research Analyst for Reg AC Certification Violation
Commentary by Steven Lofchie
The SEC sanctioned a research analyst for maintaining a company's "BUY" rating in a research report while expressing his personal view in private communications that the company should have been downgraded. Because the analyst refrained from downgrading the company in order to maintain his relationship with the company's management, the analyst violated the certification provisions of SEC Regulation AC, which requires a research analyst to include a certification in each research report that their personal views are reflected accurately in the report. The SEC suspended the analyst for one year and imposed a fine of $100,000.
Commentary
This case highlights the need for firms to anticipate conflicts of interest that may arise from research analysts' relationships with the management of companies they research. These relationships may serve a legitimate research function, but they also introduce the possibility, as here, that an analyst will avoid downgrading a company in order to maintain a good relationship with its management. This is especially true when an analyst's compensation is based (at least in part) on the access to company management that the analyst can provide to the firm's customers.
Although this case addresses the violation of the analyst certification provisions of Reg. AC specifically, it is also relevant to the overarching requirements of the new FINRA Research Rules, which obligate firms to promote objective and reliable research, and manage conflicts of interest involving interactions between research analysts and subject companies. These new principles-based requirements give FINRA additional tools to sanction firms for the kind of violation that occurred here.